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The Fantasy Football Movement

August 15, 2016
The name says it all. It's make-believe. 

Yet, fantasy football -- a contrivance built on games that are already a form of entertainment escapism -- has become the driving influence that makes the NFL utterly captivating and personal for tens of millions of fans.

The fantasy aspect of football has become so essential to NFL Sundays that pregame TV programming is largely devoted to providing real-time information and advice so fans can call their own last-minute audibles for their rosters.

Fantasy football's influence is so overwhelming, the NFL created an entire commercial-free channel, Red Zone, to feed the ravenous appetite of fantasy followers. 

Recently, the latest version of fantasy football, so-called daily fantasy, has caused such tumult that attorneys general have been scrutinizing it and lawmakers across the country have been compelled to address it in legislation.

For instance, in Maryland earlier this summer, state Comptroller Peter Franchot issued regulations that form the framework of consumer protections for folks who want to play the contests.

So why has this make-believe thing called fantasy football become so darn important?

"Because fans come to fantasy already pre-obsessed with the NFL," said Bob Harris, a fantasy football writer and radio host who has been on the beat for more than two decades. "And the only way to make that obsession more tolerable is to become part of thing they love so much. They can't throw a pass or make a tackle or even tape an ankle. But they can do this. They can act like a general manager or coach and show that they're smarter than the schmucks who get paid to do it.

"And because it is so deeply rooted in the culture now, and because it's something we use to connect with our friends and co-workers, it does matter!"

Fantasy Sports Numbers

A survey conducted earlier this year in the United States and Canada quantified what any sports fan already knows: fantasy is huge. The results indicated 57.4 million people participated in fantasy sports in 2015, according to a survey conducted by Ipsos Public Affairs, a global research company. The study was conducted for the Fantasy Sports Trade Association.

To be sure, the growth of fantasy sports has slowed -- it was just a 1 percent increase from the previous year -- but that may be due to the fact that the participation baseline has gotten so big. It's virtually impossible to sustain the huge percentage gains the hobby had been enjoying. From 2005-2015, participation grew 450 percent, according to the trade association.

The survey found 82 percent of all players participate in the traditional season-long version, and 19 percent play exclusively in the newer short-duration fantasy contests, commonly referred to as daily fantasy sports.

The overlap for players who enjoy the traditional and daily formats is 17 percent.

But the survey disclosed far more than merely eye-catching participation figures. It was the kind of information sports leagues have known for years and helps to explain their infatuation with various iterations of fantasy contests.

Fantasy players said:
- 64 percent watch more sports because of fantasy sports
- 61 percent read more sports because of fantasy
- 54 percent of consumers would pull the plug on their league-backed TV subscriptions, apps and other specialty media if there was no fantasy sports

For all the tinkering sports leagues have done during the years, such as rules changes in order to encourage more excitement and engagement, it's hard to imagine any league-initiated tweaks that match fantasy sports in generating fan enthusiasm.

"In the early 2000s, the NFL began realizing that the fantasy consumer was their best customer," said Peter Schoenke, chairman of the Fantasy Sports Trade Association and a principal in two fantasy sports businesses. "The league knows that fantasy fans buy more [TV] game packages; they go to more. And daily fantasy has accelerated all that. ... Prior to the early 2000s, the NFL was sort of hands-off with fantasy, but you can see how that's changed."

Traditional Fantasy Football Still King

Fantasy sports has become a dual universe.

Beginning with the first fantasy sports leagues conceived in the early 1960s until less than 10 years ago, fantasy sports was exclusively about season-long contests.

By now, everyone knows the drill: A bunch of friends get together before football or baseball season, they pick their teams in what's generally called a "snake draft" (similar to the NFL's annual draft of college players), and as the season progresses, team owners drop and add players and perhaps make a few trades.

The real athletes play, their home runs and touchdowns are converted into fantasy points and the fantasy owner with the most productive roster wins.

A 2006 federal law meant to provide enforcement mechanisms that would impede illegal online gambling (it did wind up putting the brakes on the burgeoning internet poker industry) spurned a new kind of fantasy sports play.

In defining certain terms, the federal law exempted some activities, such as buying and selling stocks, insurance policies and, under specific conditions, fantasy sports. The law also contained language implying fantasy sports was a pursuit requiring skill or knowledge.

Some have referred to the exemption as a fantasy sports carve out. In any event, it prompted some imaginative folks to figure if a season-long fantasy sports contest could be legally monetized (at least according to this federal law), how about a contest of shorter duration?

Hence, daily fantasy was born. With the help of venture capital investments in 2015 that allowed for massive marketing efforts, DFS companies DraftKings and FanDuel are now familiar to most fans, even ones who don't participate.

However, despite all the hoopla, advertising and, indeed, billions of dollars in entry fees that mainly change hands among DFS participants, the vast majority of fantasy football participants (82 percent) are still enjoying that old-time religion of traditional season-long fantasy. And make no mistake about it; fantasy football is the dominant sport over baseball, basketball and other sports, although not by as big a margin as previously

"As much as the [fantasy sports] industry focused on DFS the last couple of years, most people still play season-long for the same reason they've always played, and that's because it's fun, for the bragging rights, to get together with their friends," said Ken Zalis, who offers fantasy sports advice for PressBox and has consistently outperformed peer experts in drafting and in-season selections.

"The industry has lost sight of that lately, and they've tried to make it about the money. Look, we all want to make money if we can, but I compare it to the athletes who actually play the sports. They got into the game because they loved the game and it was fun. I think one of the reasons [daily fantasy] hasn't grown the way the industry envisioned it would is because rather than [DFS operators] making their contests about fun, they made it about money."

Zalis is encouraged by another new version of fantasy football called "best ball." In best ball, fantasy owners have a larger draft selection, say, 20 to 25 NFL players. Then each week, a computer program simply counts the highest scoring players at each position on each roster (one quarterback, two running backs, three wide receivers, and so on). Unlike the typical fantasy regimen, owners don't have to worry about setting lineups each week and there are no in-season roster adjustments.

"What they found is that the thing a lot of people liked best about fantasy football is the draft," Zalis said. "With best ball, you go through the draft and then you don't have to worry about anything the rest of the season. People said what they wanted and someone listened."

DFS: Where Money Matters

Daily fantasy enthusiasts may argue their favorite version of fantasy sports is also about having fun, but, as Zalis pointed out, the money element is front and center. 

The biggest prize to-date in a single fantasy football contest was handed out in January to the first-place finisher in DraftKings' Fantasy Football World Championship. Aaron Jones, a lanky professional poker player, won $5 million in the live contest held in San Diego. Overall, DraftKings' big football finale handed out $15 million in prize money.

FanDuel's football champion was Roman Edmond, of Sterling, Va., who collected $3 million in December.

In the DraftKings football championship, a Baltimore-area recreational fantasy player, Eddie Rybolt, from Sparrows Point, Md., finished fifth. Fifth place paid $300,000.

Rybolt, who plays under the screen name "rockenraven," was the Cinderella story of the competition, as he admitted to being "flat broke" and facing tough times before hitting the fantasy football windfall.

"It was a blessing for me and my family," Rybolt said.

Despite the jaw-dropping dollar figures getting tossed around in the discussion of daily fantasy sports, there is a lot of uncertainty about where daily fantasy is headed.

"We're at a crossroads in DFS," said Adam Krejcik, a principal at Eilers & Krejcik Gaming, LLC, a boutique research firm specializing in gaming equipment, technology and interactive gaming. Krejcik's financial analysis of the daily fantasy business was groundbreaking when the industry was virtually unknown.

"It's hard to say definitively where it's headed," he said.

Krejcik and Chris Grove, a writer and publisher who focuses on online gaming, released a report earlier this year recapping a tumultuous 2015 for daily fantasy.

Their analysis revealed information many fans may find surprising. For instance, despite the high-profile presence DFS companies projected in TV advertising and within sports network programming, both companies lost tons of money in 2015, according to the Eilers & Krejcik analysis. The losses were mainly due to the substantial cost of the advertising blitz that grabbed everyone's attention.

The report estimated FanDuel's net revenue for 2015 at $174 million on estimated entry fees of $1.77 billion. For DraftKings, net revenue for 2015 was estimated at $106 million on entry fees estimated at $1.17 billion.

However, revenues were overwhelmed by expenses on the balance sheet.

The Eilers & Krejcik update estimated FanDuel lost $137 million in earnings before interest, taxes, depreciation and amortization (EBITDA). DraftKings had an EBITDA loss of $280 million.

Both companies were able to sustain such losses and continue operations because of successful venture capital forays in 2014 and 2015 when the two companies built hefty war chests as they brought on a laundry list of superstar investors and partners -- Comcast Ventures, KKR, Google Capital, Time Warner, NBC Sports Ventures and others for FanDuel (not to mention the National Basketball Association's equity stake in the company); and Fox Sports, Major League Baseball, the National Hockey League, Major League Soccer, Madison Square Garden, The Kraft Group and others for DraftKings.

DFS Hits Headwinds

However, life has changed for the daily fantasy industry since the halcyon days of last summer when big-time backers were willing to open their checkbooks in exchange for a percentage of the business.

First, the advertising tidal wave that hit TV at the beginning of the 2015 NFL season woke up politicians, attorneys general and mainstream media that had been virtually clueless about the daily fantasy culture.

The question was obvious: Hey, isn't this gambling and should something be done about it?

Then, a highly publicized incident in which a DraftKings employee inadvertently released embargoed website information on the same weekend he won $350,000 on rival FanDuel raised suspicions of insider impropriety. An investigation by an outside law firm found no evidence of cheating and no charges have been filed, but enormous PR damage was done.

In the aftermath of all the unflattering attention, DFS companies found the millions and millions of dollars they had spent to recruit new customers last football season weren't the only big checks they had to write. There was also going to be the expense of lawyers and lobbyists to fend off challenges to the DFS industry's right to even do business in state after state. In February, the Wall Street Journal reported the daily fantasy sports industry had 78 lobbyists in 34 states advocating on its behalf.

What that suggests is that a repeat of last football season's advertising avalanche is unlikely, unless there's an infusion of cash.

"They'd have to find some funding before the football season to shore up the balance sheet," Krejcik said.

To make up for less conventional advertising, DFS companies may have to rely on their databases of users recruited over the last year and use much cheaper, digital methods -- like email pitches and social media -- to encourage those customers to continue or resume playing DFS contests.

Challenge Ahead

As the 2016 NFL season approaches, DFS companies face the challenge of generating the kind of revenue that allows them to continue operating at a high level and attracts future outside investment.

The key to that is gaining as much explicit legal acceptance as possible in state legislatures throughout the country.

As of early August, eight state legislatures had passed laws essentially giving DFS a green light. In New York, obviously a key state with hundreds of thousands of DFS customers, the governor just signed DFS-friendly legislation. A bill in Massachusetts was awaiting the signature of that state's governor.

Earlier this year in Maryland, the General Assembly set aside the DFS issue for more study after state senate president Mike Miller called for a referendum. Since then, Comptroller Franchot issued proposed regulations that provide consumer protections welcomed by the daily fantasy industry. As of early August, DFS was open to Maryland fans.

Several other states are mulling laws that would give daily fantasy legal cover.

Some legal experts believe DFS has been doing a good job at damage control.

"Compared to the amount of legal friction the industry was encountering just last fall, when you look at the amount of states that have already created carve-outs and considering the many states that continue to consider such legislation, I think they've done very well," said Ryan Rodenberg, an assistant professor in the department of sport management at Florida State University. In May, Rodenberg testified at a Congressional subcommittee hearing on daily fantasy sports, the first of its kind.

Still, DFS has its hands full. For instance, in Texas, an unfavorable opinion by the attorney general has caused opposite reactions.

"DraftKings is suing the attorney general and FanDuel raised the white flag," Rodenberg said. DraftKings still operates in Texas as it fights a legal battle, while FanDuel does not.

In the long run, though, when it comes to fantasy sports -- whether the discussion is about the traditional or the short-duration version -- there is too much to be gained by too many interested parties.

"Advertisers, sports leagues, broadcasters have all tapped into something with fantasy sports," Rodenberg said. "They have all sensed this shift from passive spectating where you sit on the couch, crack open a beer and just watch, to wanting to be actively engaged and feel like you're a part of the action. The shift is profound."

It's a shift that will continue to be driven by changes in consumer technology as more fans use mobile devises to participate in the fantasy experience, Rodenberg said.

"When you consider what's to be gained by all those influential forces -- sponsors, broadcasters, the leagues," Rodenberg said, "even though it's fantasy, it's very, very real." 

Issue 224: August 2016